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Real Estate prices going down down down

By johnboy - 1 November 2013 31

The dinner party bores have fallen silent as the ABC reports on Canberra’s ever softening real estate market:

the situation in Canberra is different where real estate prices slipped 1.5 per-cent in October.

The Housing Industry Association (HIA) says uncertainty over public service jobs is driving the fall.

HIA senior economist Shane Garrett says the easing of prices in the national capital is not surprising after the election.

“It is a fall back in price values in Canberra over the last quarter.

Having recently been looking for a rental property I was surprised to see naked panic amongst landlords. That’s got to flow on eventually.

Shall we call this a win for Andrew Barr’s affordable housing policies?

What’s Your opinion?


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31 Responses to
Real Estate prices going down down down
milkman 12:20 pm 03 Nov 13

JC said :

milkman said :

It’s always nice to bring up conspiracy theories and throw around terms like ponzi, but the simple reality is that there is probably $250k of labour alone in a new 4 bedroom house. You’ve also got land development costs, building materials and everyone in the development chain getting their slice of profit.

Interesting you use the word probably, meaning of course you don’t really know. Now I don’t know the cost of labour either, but I do know what it cost me to build my house 13 years ago. That cost was $100,000 for a standard 3 bedroom house, excluding land, stamp duty etc.

Now 13 years was a long time ago, but wages have more than doubled in that time and the cost of materials doubled too. So my house would probably (again like you I don’t really know) cost $200,000-$250,000 to build again excluding land costs.

Back then to go to a 4 bedroom and separate dining I was looking at $20,000 (which I should have done in hindsight) extra so in today’s terms using the method above that would be $40,000.

So using some real figures and some thought I would say the cost to build a standard 4 bedroom house, materials and wages would be in the order of $250,000 to $300,000 excluding land.

Now looking around at land prices and the cost of brand new houses, I reckon I am pretty much on the money with these figures.

So where did your figure of $250k for labour alone come from?

Incomes in the macro may have doubled, but what trades charge for labour on jobs is MUCH higher than that (at least triple). My figure comes from experience in building and renovating over the past 15 years.

And yes, I use terms like ‘probably’ because I don’t have a crystal ball. My opinion, and those of other posters, are just that – opinions.

Now, I’ve always been cognisant of the risk of a significant fall, so I tend to focus on buying properties that have reasonable to good yield, and properties where I can improve the yield (e.g. through renovating). This has led to a situation where my property portfolio generates significantly more cash than it costs to hold, so short term fluctuations don’t really matter. The loans have all been written in nominal amounts from the past, so inflation helps me in real terms. Eventually I’ll just live off the income the properties generate; I have no real need or compelling reason to sell. This is why short term changes don’t worry me.

OpenYourMind 10:54 am 03 Nov 13

I always get the impression when reading RiotACT posts on this topic that there’s a group of people that imagine impossibly cheap ‘affordable’ housing. They seem to lament the $50,000 house of yesteryear, but don’t seem to yearn for $10k per annum salaries to go with the old house prices.

JC 9:34 am 03 Nov 13

milkman said :

It’s always nice to bring up conspiracy theories and throw around terms like ponzi, but the simple reality is that there is probably $250k of labour alone in a new 4 bedroom house. You’ve also got land development costs, building materials and everyone in the development chain getting their slice of profit.

Interesting you use the word probably, meaning of course you don’t really know. Now I don’t know the cost of labour either, but I do know what it cost me to build my house 13 years ago. That cost was $100,000 for a standard 3 bedroom house, excluding land, stamp duty etc.

Now 13 years was a long time ago, but wages have more than doubled in that time and the cost of materials doubled too. So my house would probably (again like you I don’t really know) cost $200,000-$250,000 to build again excluding land costs.

Back then to go to a 4 bedroom and separate dining I was looking at $20,000 (which I should have done in hindsight) extra so in today’s terms using the method above that would be $40,000.

So using some real figures and some thought I would say the cost to build a standard 4 bedroom house, materials and wages would be in the order of $250,000 to $300,000 excluding land.

Now looking around at land prices and the cost of brand new houses, I reckon I am pretty much on the money with these figures.

So where did your figure of $250k for labour alone come from?

milkman 7:14 am 03 Nov 13

Arescarti: I do enjoy our debates here, we have such differing opinions.

First, I’d suggets that if you think property returns less than money in the bank, you obviously don’t know how to choose an investment property. They aren’t all the same, you know, and there are investors (like me) who are actually quite interested in yield and yield growth, and have specific strategies to increase yield.

Also, if you think the labour and materials for a modern 4 bedroom house are less than $250, I’d invite you to speak to a few builders.

California and Florida are also interesting cases, but I wonder about things like their median incomes, including the illegals who ilve there. Both these states have a lot of poverty, especially when compared with ACT.

Oh, and quoting articles from what is possibly the famous property bear site in Australia won’t make me change my mind.

I don’t believe land is constrained in ACT, but Canberrans are well know location snobs and demand for inner suburbs will probably stay high.

Finally, I wouldn’t see 5-8% as a crash. This is due in part to the quality of a lot of the stock on market (including newly built stock, much of which is rubbish), and partly due to the prices I have, and do, pay when buying. If property was to fall, say, 10%, I won’t be crying, I’ll be out buying more. People need to live somewhere, and in a town which (long term) will have an educated and well paid workforce I think property is probably the asset class with the most reliable returns, provided you know how to choose!

arescarti42 10:43 pm 02 Nov 13

milkman said :

It’s always nice to bring up conspiracy theories and throw around terms like ponzi, but the simple reality is that there is probably $250k of labour alone in a new 4 bedroom house. You’ve also got land development costs, building materials and everyone in the development chain getting their slice of profit.

“A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation.”

This is exactly how housing investment works, except that it isn’t fraudulent. The net rental return on investment property is now less than what you’d get by just putting the money in the bank. Investors aren’t investing in the underlying income generating potential of the asset, it’s purely speculative. The only way that property investors can turn a profit on their ‘investment’ is if new entrants to the market are willing to pay ever increasing amounts of money (in real terms) for their investment. That’s how a ponzi scheme works. Once you run out of debt to keep inflating prices or suckers to keep buying investments, the scheme falls apart.

I agree that adding new supply is expensive, but they’re not physical, underlying costs, they’re all constructed. The labour and materials for a modern 3-4 bedroom home are well under $250k, it’s the taxes, charges and land that make it expensive. If taxes, land release and planning laws were the same as they were 20 years ago, there’s no reason at all a modest new house and land package couldn’t cost $250-300k.

milkman said :

Canberra has plenty of expensive units (most of which still seem to sell), but when it comes to houses we are under supplied, and current prices don’t justify building more stock despite our population trending up. This puts a floor under house prices in the longer term.

The whole “demand is high and supply is constrained, so price falls will be contained” idea is a fundamentally and demonstrably flawed concept that has been a feature of property bubbles the world over.

Constrained supply causes volatility, prices rise quickly as demand increases, and fall just as quickly when demand falls. Demand for housing and household size is also far more elastic than it is assumed to be.

http://www.macrobusiness.com.au/2013/02/mb-presentation-housing-supply-price-volatility/
http://www.bowdoin.edu/~ytang/Huang-Tang-Aug-2011.pdf

California and Florida both had reportedly horrendous housing supply shortages and massive population growth. When the ass fell out of the US economy, employment tanked and household size rose dramatically, demand evaporated, prices crashed and they were left with a huge housing oversupply.

Sydney is perhaps the only place in Australia that has a fundamental and underlying deficiency of dwelling supply.

milkman said :

Yes, Canberra house prices are softening, but a major crash in nominal terms? I very much doubt it.

I guess it depends what you consider a “major” crash.

SQM expects Canberra to be down 3-6% in nominal terms this year, and their base case is down 1-4% for 2014. Their weaker scenario is 5-8% nominal falls.

And SQM is a mainstream forecaster making far more optimistic assumptions than the likes of me.

JimCharles 10:41 pm 02 Nov 13

milkman said :

arescarti42 said :

milkman said :

PantsMan said :

Can’t wait for $250k per annum household Canberra commie public servants to now, after having enjoyed the capitalist up-swing, demand the government socialise their losses.

Isn’t going to happen.

I have total faith in our spineless self interested elected officials to completely ruin the economic future of today’s youth and future generations by throwing everything they’ve got on the housing debt ponzi bonfire.

Just look at what happened in the US and Europe when the SHTF. They wasted trillions trying to prop the system up, burdening future generations with crushing debt.

Admittedly when efforts to keep the party going inevitably fail, you can just about guarantee the only losses that will be socialised will be those of the banks.

It’s always nice to bring up conspiracy theories and throw around terms like ponzi, but the simple reality is that there is probably $250k of labour alone in a new 4 bedroom house. You’ve also got land development costs, building materials and everyone in the development chain getting their slice of profit.

Canberra has plenty of expensive units (most of which still seem to sell), but when it comes to houses we are under supplied, and current prices don’t justify building more stock despite our population trending up. This puts a floor under house prices in the longer term.

The real wildcard is whether the fed government decides to trim the PS back. If they have a decent go at this, prices will drop, for a time. But the other fundamentals are still in place. Canberra has crap infrastructure for getting in from outer suburbs (and the schools out there are none too flash either), building costs are rising (despite tradies being under utilised), land is EXPENSIVE here, and new developments incur a lot of tax (of various types).

If I were buying (and I might buy another 1 or 2 in the next couple of years) I’d be hunting for well located bargains that need work, and taking advantage of the fact that many tradies are short on work and would be willing to negotiate prices to renovate up to a better standard in a good location. Still expensive, but an effectiive way to get into a nice property and generate some equity as you go.

Yes, Canberra house prices are softening, but a major crash in nominal terms? I very much doubt it.

$250,000 of labour costs can be reduced by more efficient building techniques, better supply chain, cheaper wages.
Not saying that’s going to happen here, but it’s happened elsewhere when it was thought to be nigh on impossible.

milkman 8:04 pm 02 Nov 13

arescarti42 said :

milkman said :

PantsMan said :

Can’t wait for $250k per annum household Canberra commie public servants to now, after having enjoyed the capitalist up-swing, demand the government socialise their losses.

Isn’t going to happen.

I have total faith in our spineless self interested elected officials to completely ruin the economic future of today’s youth and future generations by throwing everything they’ve got on the housing debt ponzi bonfire.

Just look at what happened in the US and Europe when the SHTF. They wasted trillions trying to prop the system up, burdening future generations with crushing debt.

Admittedly when efforts to keep the party going inevitably fail, you can just about guarantee the only losses that will be socialised will be those of the banks.

It’s always nice to bring up conspiracy theories and throw around terms like ponzi, but the simple reality is that there is probably $250k of labour alone in a new 4 bedroom house. You’ve also got land development costs, building materials and everyone in the development chain getting their slice of profit.

Canberra has plenty of expensive units (most of which still seem to sell), but when it comes to houses we are under supplied, and current prices don’t justify building more stock despite our population trending up. This puts a floor under house prices in the longer term.

The real wildcard is whether the fed government decides to trim the PS back. If they have a decent go at this, prices will drop, for a time. But the other fundamentals are still in place. Canberra has crap infrastructure for getting in from outer suburbs (and the schools out there are none too flash either), building costs are rising (despite tradies being under utilised), land is EXPENSIVE here, and new developments incur a lot of tax (of various types).

If I were buying (and I might buy another 1 or 2 in the next couple of years) I’d be hunting for well located bargains that need work, and taking advantage of the fact that many tradies are short on work and would be willing to negotiate prices to renovate up to a better standard in a good location. Still expensive, but an effectiive way to get into a nice property and generate some equity as you go.

Yes, Canberra house prices are softening, but a major crash in nominal terms? I very much doubt it.

arescarti42 6:34 pm 02 Nov 13

milkman said :

PantsMan said :

Can’t wait for $250k per annum household Canberra commie public servants to now, after having enjoyed the capitalist up-swing, demand the government socialise their losses.

Isn’t going to happen.

I have total faith in our spineless self interested elected officials to completely ruin the economic future of today’s youth and future generations by throwing everything they’ve got on the housing debt ponzi bonfire.

Just look at what happened in the US and Europe when the SHTF. They wasted trillions trying to prop the system up, burdening future generations with crushing debt.

Admittedly when efforts to keep the party going inevitably fail, you can just about guarantee the only losses that will be socialised will be those of the banks.

milkman 3:54 pm 02 Nov 13

PantsMan said :

Can’t wait for $250k per annum household Canberra commie public servants to now, after having enjoyed the capitalist up-swing, demand the government socialise their losses.

Isn’t going to happen.

PantsMan 3:02 pm 02 Nov 13

Can’t wait for $250k per annum household Canberra commie public servants to now, after having enjoyed the capitalist up-swing, demand the government socialise their losses.

neanderthalsis 1:49 pm 02 Nov 13

Shall we call this a win for Andrew Barr’s affordable housing policies?

Rather ironic that success for the Housing affordability comes not from any grand land rent rort or other half baked policy, but from simply reducing demand thanks to our PM and his grand plans for a leaner, meaner APS.

banco 1:05 pm 02 Nov 13

milkman said :

Right now I’d say any time during the next year will be a good time to buy. Depending on what happens with the Fed budget next May, we may even have a couple of years of buyers market.

Just be careful, though, because as the market has softened due to big scary PS cuts, it will spring right back when the scare is over. The other fundamentals, like land price, cost of building and cost of finance have not changed.

Yes but there’s a good chance by the time the local APS pain stops (in a couple of years) the rates cycle etc. will have shifted. Hopefully the next couple of years will shake some of the parasites lose from from ACT real estate industry.

milkman 8:33 am 02 Nov 13

Right now I’d say any time during the next year will be a good time to buy. Depending on what happens with the Fed budget next May, we may even have a couple of years of buyers market.

Just be careful, though, because as the market has softened due to big scary PS cuts, it will spring right back when the scare is over. The other fundamentals, like land price, cost of building and cost of finance have not changed.

HiddenDragon 12:43 am 02 Nov 13

Before we know it, the VFT will make us a commuter suburb of Sydney, but in the meantime there may, just, be some long overdue good news for renters and first home buyers (and, of course, brave speculators, er, I mean investors).

Darkfalz 11:46 pm 01 Nov 13

Excellent news. Keep going!

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